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How do Self Certified Mortgages Work?

Although still in existance today they may not be for much longer – the days are numbered for self certified mortgages but if you are looking for one because you are self employed then this is how they work.

If you are employed but unable to prove your income, self employed, a first-time buyer or even have a bad credit history it was very difficult for you to get a mortgage to buy a home. These are the circumstances in which you may have considered a Self Certified Mortgage.

What is a Self Certified Mortgage?

Mortgage lenders usually use salaries declared on wage slips to work out a borrower’s annual income and will usually lend up to a fixed multiple of the borrower’s annual income. A self-certification mortgage is one where the borrower certifies his or her own income, rather than provide proof of it to the mortgage lender for assessment. Self-certification deals are designed to help self-employed people and people with multiple sources of income who would find it difficult to provide proof of their full income.

Self Certified Mortgages were a result of the 1980s financial boom in the UK, which resulted in many people becoming self employed. Although they were earning very good money a mortgage lender usually required 3 years accounts from a certified accountant and the new, self-employed entrepreneur, often with income from several sources, found it very difficult to provide this proof.

The Good Years for Self-certified Mortgages

These kinds of loans worked while the economy was doing well. Times were good, people were making money and able to keep up with the repayments on their mortgages. Property prices seemed to be on a never-ending upward spiral, ensuring that people who took out high loan-to-value home loans soon had sufficient equity in their properties, at least on paper, for lenders to see these lenders as low-risk. The self-certification mortgage market was a money-making machine, which those involved in that market thought would last forever.

And now the Bad News about Self-Certified Mortgages

Since the credit crunch, these deals have almost totally disappeared due to the risks involved in banks lending money without proof of the borrower’s income. In the UK the FSA (Financial Services Authority) has announced that that new rules will include a ban on lending without proof of income. It wants to ensure that lenders lend only to those who can afford to repay. Without having a detailed knowledge of a borrower’s financial situation this is simply not possible.

These new rules are due to be introduced early in 2011. Currently self certified mortgages are now available from a very small selection of lenders and are likely to disappear completely next year.

What Self- Certified Mortgages did for YOU!

In the USA there was no regulatory body like the FSA, looking after the interests of the lender and the borrower. Because of this lack of regulation cowboy brokers were able to break the rules in order to make lots of money. Many mortgages, especially self certified mortgages, were mis-sold, and homeowners defaulted on their repayments. This, in turn, was blamed for the financial downturn which has affected the world ever since.

These self-certified mortgages, taken out by people who simply could not afford the loans they were taking on, were dubbed ‘liar loans’, as people inflated their incomes to imaginary heights in order to secure the load they needed to buy a home.

What you will have to do to get a Self-Certified Mortgage in the USA

While such loans are still available in the USA for the time being you will have to provide far more evidence of income than previously.

More documentation: Two years of tax returns, self-employed borrowers might be asked to provide a profit-and-loss statement, bank statements and proof that they’ve been in business for at least two years. Lenders require further verification, such as a business license.

Fewer tax deductions: It is common for the self-employed to claim a large amount of tax deductions, to avoid paying tax on their income. The problem is that by doing this your business may show a loss.

Larger down payments: Zero down payments have disappeared. A much larger deposit is required.

An excellent credit rating: You will stand a chance of getting a self cert mortgage only if you have an excellent credit past.

The bottom line is that Self-Certification Mortgages may vanish from the financial landscape in the near future. You will need to look at other types of mortgage loan if you are not capable of providing proof of your income.

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